| | | BWXT: Jenny Hubbard of Vela Investment Management, interviewed in Graham and Doddsville, Fall 2023
"I came across BWXT, which looked really interesting. It had been,
I think, unduly stigmatized, not only due to concerns about defense spending, but also because they had gone through a pretty significant capex ramp over the prior couple of years to increase capacity and enhance some of their niche competencies. We thought there was a likely chance that capex would return to more maintenance type levels, so you'd see an improvement in free cash flow over the five- year time horizon. Then, I started researching their core business, which has very high barriers to entry and consistently high margins and returns on invested capital. We're talking a high teens margin business that is underpinned by the US Navy. Specifically, BWXT provides critical aspects of naval nuclear propulsion for Navy subs and aircraft carriers.
Given the imperative of national defense and the strategic importance of naval defense, in particular, to the geographies where we're seeing significant conflict and threats right now, we were fairly confident that the government would be committed to increasing defense spending. The visibility for BWXT’s core business is very high. You can look at the Department of Defense budgets and planned build outs of naval ships and see what is projected out for 10 years and what's expected to come online. In addition, another small cap holding we have is a Navy ship
builder, Huntington Ingalls. Because we own Huntington Ingalls, we follow their ship building plans and they happen to build many of the ships for which BWXT is building content. So, that core business, which represents about 80% of BWXT's total revenue and profit, is very attractive and tends to be countercyclical.
On top of that, BWXT has many other capabilities in terms of its nuclear competencies that will work to help solve many other global issues. These include nuclear fuel and uranium processing. They've also started building micro reactors, and in fact have beaten out
"These microreactors, which the US is working to install in military bases around the world, are intended to be more immune to cyber- attacks. That is likely to be a promising driver of future growth for BWXT."
competitors for recent contracts, which are very important for powering the defense grid. As you might've heard, one of the biggest threats from China is cybersecurity. These microreactors, which the US is working to install in military bases around the world, are intended
| to be more immune to cyber-attacks. That is likely to be a promising driver of future growth for BWXT.
They also, in their Commercial segment, are very proficient with nuclear energy. Canada probably has the cleanest grid in the world, and 60% of their power comes from nuclear energy. BWXT has been working with many of Canada's power sources to provide equipment, manufacturing, technical services, safety checks, and other services for nuclear energy facilities for some time.
Given the concern about fossil fuels going forward, the US has started to get interested once again in nuclear energy. BWXT is working on some promising projects in terms of building smaller nuclear reactors for the US. That's another potential growth area.
Also, while small, BWXT Medical could be a nice growth business in time. BWXT has very strong capabilities with respect to medical radioisotopes, which is an area where they're making great progress in terms of not only diagnosing, but also treating cancer. They have some very niche abilities there. They've recently won some contracts to provide some of these materials to larger pharma companies. If they get FDA approval for their Tc-99m material, which is said by the company to be one of the most promising materials for nuclear medicine, BWXT
Medical could grow to a meaningfully sized business over time.
If you take a step back, this is a company buttressed by a very strong core business that's critical to national defense, many promising growth areas across their other nuclear capabilities, and you have a chance for increased cash flow conversion. We think even at current prices, it's not fully discounting the potential upside we could see in revenue growth. Then, there is also the accompanying multiple expansion that may occur as the market begins to appreciate BWXT’s unique ability to respond to a number of very important secular trends."
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